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Kennedy Key in Interstate Suit Spat

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By Nicholas Datlowe

Nov. 30 — Next week
the U.S. Supreme Court will take up, for the second time, a fight
between a Nevada taxpayer and California's income tax collection
authority.

According to one constitutional scholar, the case
boils down to a fundamental constitutional question: What is
federalism? (Franchise Tax Bd. of Cal. v.
Hyatt, U.S., No. 14-1175, oral argument
scheduled 12/7/15).

Put another way, the question is whether federalism
“protects states from the federal government, or from each other,”
Stephen I. Vladeck, a professor at American University Washington
College of Law, Washington, told Bloomberg BNA Nov. 24.

Vladeck helped author an amicus brief, on behalf of
several professors of federal jurisdiction, in support of Nevada
taxpayer Gilbert Hyatt.

“How much one is at risk when one travels to another
state, and how much the other state can harass them when they
leave” is the “real question” beyond the abstract federalism
inquiry, Vladeck said.

Kennedy at Center Stage?

Charles W. Thompson Jr., general counsel and
executive director of the International Municipal Lawyers
Association, Bethesda, Md., agreed, but framed the issue
differently.

It is “relatively frequent” that representatives of
local governments near state borders have to cross state lines,
such as police in hot pursuit, or as emergency responders, he said.
“Even if they don't get the protection they would have in their
home state, they should get the protection of the host state,” he
told Bloomberg BNA Nov. 19.

It's a “very significant” issue for municipalities,
he added.

IMLA submitted an amicus brief, along with a number
of intergovernmental associations, in support of the Franchise Tax
Board of California.

He also suggested that, as in the same-sex marriage
cases, Justice Anthony M. Kennedy would supply the deciding vote
and write the majority opinion.

A Tax and Attacks

According to the parties' briefs, Hyatt earned
hundreds of millions of dollars by licensing technology
patents—money on which California believed he owed state income
taxes. Hyatt claimed to have moved to Nevada, but the FTB—charged
with collecting California income taxes—believed that he had
falsified his residency to avoid the taxes.

After auditing, the FTB determined that Hyatt owed
more than $10 million in back taxes, interest and penalties.
Hyatt's administrative challenges to those decisions are still
pending, more than 25 years later.

In the meantime, Hyatt also sued the FTB in Nevada,
alleging several Nevada state law torts. He argued that the FTB
went “well beyond legitimate bounds in their attempts to extract a
tax settlement,” including allegations that one FTB auditor said
she was going to “‘get that Jew bastard,'” referring to
Hyatt.

In a previous trip to the Supreme Court, the
justices held that the FTB wasn't entitled under the full faith and
credit clause to the absolute immunity that it would have had in a
California court, in Franchise Tax Bd. of
Calif. v. Hyatt, 538 U.S. 488 (2003) (71 U.S.L.W. 1661,
4/29/03).

This time around, the FTB argues that as a matter of
state sovereignty, it can't be haled into Nevada's courts without
its consent in the first place—or, if it can, that it's entitled to
at least the same immunity that Nevada would accord to its own
state entities.

‘Frontal Assault.'

The problem with the first argument is that it's
what Vladeck called a “frontal assault” on Nevada v. Hall, 440 U.S. 410 (1979), where the
Supreme Court said—in another battle between Nevada and
California—that state entities can be
haled into the courts of other states without their consent.

Vladeck said that case wasn't unique when it was
decided, but subsequent decisions appear to have taken it
over.

In a series of decisions, the Rehnquist court made
it harder for states to be sued by individuals under any law,
Vladeck said. “But it never answered the question of what would
happen if one state was haled into the courts of another state, and
it was never asked to revisit Nevada v.
Hall,” he said.

William J. Rehnquist was Chief Justice of the United
States from 1986 to 2005. He dissented in Nevada v. Hall while an associate justice.

“One of the real hallmarks of the Rehnquist court
was a renewed devotion to sovereignty, and especially state
sovereignty,” he said.

Vladeck said it was “indeterminate” which way the
Rehnquist court would have gone if asked to revisit the case. It
pits “one competing understanding of the federalist project”
against another, he said.

He also said that on the Rehnquist court both
Kennedy and Justice Sandra Day O'Connor could have been potential
swing votes. With O'Connor gone, however, it all hinges on Kennedy,
he said.

Thompson suggested that Nevada, which is not
directly involved in this case, might actually support the FTB in
this argument, however. He pointed to a recently-settled case where
San Francisco sued Nevada in California court over alleged
“patient-dumping”—busing the mentally ill across state lines
without providing for their proper care.

Good for the Goose?

The FTB's second argument—that it should be entitled
to the same immunities Nevada entities get in Nevada courts—faces
difficulties as well, because although state sovereign immunity is
a constitutional principle, it's not actually written in the
Constitution, Vladeck said.

“The conservatives on the court are doing exactly
what they accuse the liberals of doing—finding rights in the
Constitution that are not specifically explicated,” he said.

He also said that the equities of the situation are
unclear, even for pro-federalist justices, because there are state
interests on both sides of the case.

That said, the states seem to have decided where
their interests lie—44 states have joined in an amicus brief
supporting the FTB, but none has joined Hyatt.

Vladeck said he was “not surprised,” because “states
will be more worried about being dragged into another state's
courts than their citizens being able to sue in their
courts.”

He called this view “myopic,” however.

Overruling Nevada v. Hall
would leave individuals with no recourse against nonconsenting
states that act outside their borders, unless the individual's
state could sue on his behalf. But this raises questions of
standing—whether states can sue based on harms to their
citizens—and could put pressure on the Supreme Court's original
jurisdiction docket, he said.

Thompson said that in border areas like the
Washington metropolitan area, police, fire and transportation
workers are constantly moving across state lines, and the
protections and immunities afforded in each jurisdiction can vary
greatly. Those individuals should be afforded the immunities of
either the host or the home state, he said. “Pick one, but at least
one,” he added.

‘Fool's Errand.'

Thompson declined to predict how the Supreme Court
would decide the case. “I'm not a good handicapper,” he said.

Vladeck said that trying to predict how Kennedy will
vote is a “fool's errand,” but “gun to my head, I think he'll
likely vote for California, because it's hard to see the long-term
harm to states from denying relief to their citizens, given the
short-term harms.”

Still, “I hope our brief will give him pause,” he
said.

To contact the reporter on this story: Nicholas
Datlowe in Washington at ndatlowe@bna.com

To contact the editor responsible for this story:
Jeffrey D. Koelemay at jkoelemay@bna.com

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